accounting essay

The History And Background Of Budgeting Accounting Essay

Published: 23, March 2015

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The use of budgeting has become more important and effective for many organizations in the world. Budgeting is a tool that is referred to the goals and objectives of a firm in financial terms. It shows the financial planning of the organization during a fiscal year. According to Lu (2011) Budgeting helps the firm in generate reports that help in preparing the comparison of monthly performance of the organization in different areas like sales, profit, cost and etc. The critical analysis of budgeting will help us find out that whether the use of budgeting has lost its relevance in current management of the organizational goals and objectives or it has increased. Fraser and Hope are among many researchers who have written many articles on the fact that budgeting dominates the actives in an organization rather than bringing enhancement in the activities of the firm. The report will also take into consideration the views of BBRT given against the budgeting and will compare it with the articles written in favor of budgeting. Thus the report will try to find out that whether it is a tool for making the organizations successful or influencing the management decisions of an organization and make it unsuccessful.

Discussion

The major concern of budgeting in an organization is to control and plan all the activities in financial terms over a fiscal year. According to Zeneca (2010) Budgeting helps the organization in performing several budgeting functions which include planning, organizing, directing, staffing and controlling. It helps the management in defining the path and the targets that set a direction for the subordinates to enable them achieve the organizational goal in the end. The management in order to develop an evaluation about the performance of the organization or each department, it uses comparative analysis between the budgeted amounts and the actual results to see the variances or deviation from the goal set by the firm. The management then takes corrective actions to eradicate the variances or differences between the actual and the budgeted results so that targets of the organization are achieved within a specific time period.

To what extent does the type of organization, its culture and environment affect how successfully a budget might operate?

According to Segun and Olamide (2011) many people gave their view that budgeting is on its way of extinction and is losing their place in modern management. Many business managers gave their view that budgeting is taking too much time, too many cost and preserving the behavior of the managers thus it is being strongly criticized by the users in the modern world. Apart from the criticism faced by budgeting still many organizations develop their yearly and monthly budgeting reports and use them for taking several financial and management decisions. According to a survey conducted among 20 companies of Europe that were using budgeting as a performance measurement tool and had no future of abounding it in the years to come. According to Lindsay and Libby (2007)Budgeting previously was used to create centralization and control the increasing cost in an organization but over the last 20 years budget has been extensively used for creating value of the firm, helps the managers to implement the strategy, do risk management and allocation of resources in order to run their business.

Budgeting recently has been going through a phase of evolution in order to meet the increasing needs of the organizations. According to Wallin and Ekholm (2000), approximately 60% of the organizations are trying to improve the budgeting process in their organization according to the demands of the management to bring sustainability in the value of their company. Budgeting process has changed from being traditional to more flexible and dynamic by responding to the changes in the environment. Budgeting has evolved according to the changes of the environment and thus has increasingly used as a forecasting tool. It is now have become better as it has become more forward looking and has made a very good link with the strategic planning of the organization. Especially among the fast changing environment organizations are using more of budgeting as a forecasting tool. Budgeting plays an anchor role in the organization by guiding the goals of an organization but it has become flexible and can adopt the changes along the way as defined in the budgetary statements.

According to Dugdale and Lyne (2006) around 40 percent organizations in Europe adopt budgetary process before the end of six to four months in order to evaluate their financial performance in a year. In another research 95% percent of the financial managers have responded with the fact that budgets are a very important tool for planning, controlling and is a fair evaluation process of the firm&acirc;€™s performance during a fiscal year. It is also important to know the fact that budgeting is a tool for communication and coordination among the upper and the lower level of the organization. In the last five years budgeting process had gone through several changes which had increased the use of budgeting and had enabled the firm to become successful in the years to come. Today budgeting has involved junior employees more in the budgeting process, it has provided a much more detailed analysis of the performance of the different activities in the organization and now budgets are used more than for financial evaluation but for overall evaluation of the performance of the organization.

How should organizations today overcome the perceived limitations of budgets?

Although the traditional method of budgeting have changed but the there is certainly no decline in the use of budgeting in the organization. There are several limitations of budgeting that are criticized by many experts in this field. According to Webber and Linder (2005) there are several limitations of using the budgeting process in an organization. The major criticism of budgeting includes that it is time consuming, the cost of maintain is too much, the information provided through budgeting is not to reliable, the information provided through budgeting is too limited, it does not add too much value and is a waste of resources and it leads to unethical or de-motivation among the employees of an organization. Many organizations despite the amount of limitations are still using the budgeting process in order to effectively manage different activities in an organization. Another limitation that is faced by the organizations regarding the budgeting process in an organization is that it is a fixed format that a firm needs to follow, the budgeted statements are restricted and the management needs to achieve its target according to the budgeted targets.

An organization needs to overcome these limitations and try to enjoy as much benefits as possible. Management can overcome these limitations by designing flexible budgets according to which budgets can be altered and can adjust according to the changes in the economic or financial environment. Management in order to reduce the wastage of resources as criticized by the financial analysts can use corrective active actions and reduce the variances as much as possible so that an organization can achieve results closer to its targets. Today as budgeting process has evolved and enhanced therefore management can achieve specific targets by developing specific budgets for example sales budget, overhead budget, operational budget and etc. Thus now managers can use budgets to achieve specific targets and can alter budgets through making changes according to the changes occurring in the environment.

How do the criticisms of budgeting made by Beyond Budgeting Round Table (BBRT) differ from those generally acknowledged by academics today?

Beyond Budgeting Round Table was initiated 10 years ago and the main aim of the conference was to help the organizations to adapt to the changing environment and replace the budgeting technique. According to Fraser and Hope (2003) there is more important thing beyond the budgeting performed in an organization and thus performing budgeting is not the last point of planning and controlling in an organization. A conference was held where many financial managers gave their view that there are many beneficial planning tools other than budgeting in an organization. The conference as a result gave an alternative tool for evaluating the performance of an organization. The conference gave its result that there is a better measurement tool than budgeting, they concluded that there is a better model for management than budgeting and provided methods to implement the new method. The new method designed by the conference contributors is as following: design a framework regarding the principles and boundaries for the management to achieve the objectives, develop a performance evaluations and rewarding climate so that all employees achieve the target assigned to them. According to the new model, employees at either low level or at a higher level should be provided with the power of making timely decisions according to the need of the environment and as per the goals or objectives of the organization.

The conference regarding the beyond budgeting round table also emphasized that in order to achieve the results create the environment of accountability in the organization. It is important that the management should make their employees accountable to the results faced by the department or the organizations as a whole. In order to overcome the limitation of budgeting that it leads to unethical behavior it is important that provide one truth in the whole organization so that everybody is treated equally. Many participants in the conference gave their view that budgeting was more of a commanding tool provided to the managers and other leaders of the organization and had only one of aim of achieving the organization set goals or targets. Therefore it was important for the organizations to step forward and adopt new management techniques to bring enhancement in their process. It is important that managers should adopt new methods of planning and controlling of the whole organizational activities so that desired results are achieved.

According to Goode and Malik (2011) it has been a re-innovative idea for the improving the accounting management of an organization. The replacement of traditional budgeting method needs to be replaced because it does not satisfy the increasing needs of the managers due to the change occurring in the business environment. The new beyond budgeting system is an important performance evaluator for the competitors and leads to decentralization in the organizational system according to which employees from lower to upper ranks will be involved in the decision making process of the organization. The beyond budgeting has not matured yet but needs a lot of development. The development of budgets have restricted the ability of the firm to redesign itself according to the changes occurring in the environment but beyond the budget model have provided a flexible technique to the organizations for restructuring and redesign the goals according to the changes in the environment. Another criticism that leads to the creation of beyond budget technique was due to the fact that it only focuses on the cost reduction therefore management should need a method that could bring enhancement in every area of the organization and thus enable it to become successful.

Conclusion

It is not 100 percent true to say that budget has outlived their position in the 21st century but its position has certainly declined in the last 10 to 5 years. The limitations of budgeting have become the major reason for the decline in the use of budgeting but still there are more than 90 percent organizations that use budgeting. Beyond Budgeting Technique has provided an alternative to the organizations to do planning and controlling all the activities in their organization. The beyond budgeting technique has not matured yet therefore it can be used as an alternative along with the budgeting process to respond to the changes occurring in the environment and become successful in the years to come.

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